Apple’s Onshore Tax Shelters

High-tech innovation isn’t the only thing Apple excels at. Tax avoidance is another specialty. That came to the fore during Senate hearings last week. Apple’s finance wizards succeeded in sheltering over $100 billion overseas, not subject to any tax authority.

“Ocean money,” they call it.

But Apple’s ocean money is just the beginning. There’s plenty of tax avoidance on land too.

Apple is headquartered in the city of Cupertino and incorporated in California. It pays nominal state and local taxes, but in 2006, it found a way to shelter its meteoric U.S. earnings by feeding them to a Nevada corporation called Braeburn Capital. Braeburn takes a cut of every sale in the U.S. and funnels it to Nevada where it manages a growing pool of billions. Why Nevada?

Because its corporate income tax rate is zero percent.

Apple’s headquarters and employees are located in California. Apple develops its wildly popular products, manages its patent portfolio, and devises its complicated tax strategies in California. But its earnings are not, legally speaking, generated in California.

If Nevada asks for nothing in corporate taxes, why doesn’t Apple move there? Because it requires the public goods and services only a high-tax state can provide — infrastructure, access to capital markets, legal and business resources, and educational institutions.

In a world governed by common sense, in which corporations contribute to the public goods and services they use, Apple would be identified as a corporation in California. But that would subject profits to a 8.84 percent tax rate. So Apple has sought ways of defying common sense.

In effect, Apple benefits from goods and services paid for by everyone else — including individuals and small businesses — while exempting itself from any such civil obligation.

As corporate profits rise, state revenues sink
In 2011, iPhone and iPad sales generated immense profits for Apple. In the last quarter of that year alone, the company reported $7.2 billion in earnings from U.S. sales. Peter Oppenheimer, Apple’s chief financial officer, said he was “extremely pleased.” No kidding. Shares shot up to $400. A year later, Apple stock was trading at over $600 a share.

Meanwhile, California’s budget shrank by 12 percent by 2012. It was forced to raise tuition at public colleges and universities, cut K-12 educational budgets, defer maintenance on highways, bridges and ports, all while ramping up its short and long-term debt.

Did it have to be that way? If all of Apple’s U.S. earnings had been subject to California’s full corporate income tax rate, hundreds of millions might have cushioned those cuts. California isn’t alone. Apple’s state-level tax avoidance affects the budgets of at least 20 states where the company has dealings. They too receive fewer tax dollars because of Braeburn Capital.

Apple’s domestic tax avoidance doesn’t stop with corporate income. The company has also benefitted from California’s legendary and loophole-ridden property tax code.

Why doesn’t Apple move to Nevada? Because it needs the public goods and services only a high-tax state can provide.

According to one study conducted by the California Tax Reform Association, Apple saves millions annually, because more than half of its property is assessed at rates far below market value. Apple’s Cupertino headquarters, for instance, is about $1.02 per square foot.

This is ubiquitous in Silicon Valley. Under California’s Proposition 13 restrictions, real estate is rarely re-assessed to measure its current market value. Thousands of acres and hundreds of office buildings that house the most profitable corporations in the world are owned by trusts and limited-liability companies that have held property for decades, stealthily transferring equity to new generations of family members and new coteries of investors.

These real-estate tax shelters are allowing tech giants like IBM, Google, and Apple to pay artificially low taxes in a region where market real estate prices are among the highest.

Apple creates thousands of high-paying jobs, he said, mostly in California. Apple employees pay federal, state, and local taxes on income and sales. Thus Apple’s financial success ultimately trickles down to the towns and states they live in, and to the federal government each year when it collects income taxes and capital gains taxes.

He’s wrong.

Most Apple employees lost no more than 35 percent of income to the federal collector in 2012, and most deducted their California income taxes from their federal tax liability. Most probably also took advantage of the mortgage interest tax deduction. To a homeowner in the pricey Bay Area, this can mean thousands in lower taxes.

The loopholes reducing property taxes for corporations also benefit Apple’s employees, who pay property taxes disproportionate to its market value. Employees also invest their money, like most affluent people do, and pay only 15 percent on capital gains.

Even when Apple’s contribution to the tax till is considered through the secondary contributions of its employees, it’s low compared to the rates of taxation that were used to build the social and economic infrastructure that gave birth to companies like Apple.

Darwin Bondgraham is a sociologist and journalist who writes about political economy. His writing has appeared in Counterpunch, Truthout, Z Magazine and others. Follow him @DarwinBondGraham and @WashSpec.

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